Are Medicaid waiver payments taxable?

Not for federal income tax, if you live in the same home as the person you care for and the payments qualify. Under IRS Notice 2014-7, the IRS treats qualified Medicaid waiver payments as difficulty of care payments, which section 131 of the tax code excludes from gross income. That covers federal income tax only. Social Security and Medicare taxes can still apply.

What does IRS Notice 2014-7 say?

The IRS issued Notice 2014-7 on January 3, 2014. It covers payments under a state Medicaid home and community-based services waiver, the 1915(c) waiver. To qualify, the payments must be:

• made by the state, or by a certified Medicaid provider such as an agency
• paid to an individual care provider
• for nonmedical support services under the person’s plan of care
• for a person who lives in the care provider’s home

It applies whether or not you are related to the person. Care given anywhere other than the home where you live doesn’t qualify.

For payments under other state Medicaid programs, the IRS says the answer “will depend on the nature of the payments and the purpose and design of the program” (IRS Q&A 1).

Who can exclude the payments?

The test is whether the care recipient’s home is also your home. The IRS says “the provider’s home” means “the place where the provider resides and regularly performs the routines of the provider’s private life, such as shared meals and holidays with family.”

Source: IRS, Certain Medicaid waiver payments may be excludable from income, last updated April 2026.

There is also a limit on how many people you care for. Payments for more than 10 people under age 19, or more than 5 people age 19 or older, can’t be excluded (IRC §131(c)(2), Notice 2014-7).

How are the payments reported?

If an agency employs you:

• It shouldn’t withhold federal income tax from payments that qualify (Q&A 16).
• It leaves them out of box 1 of your Form W-2 (Q&A 17), and it may report them in box 12 with code II (Q&A 11).
• It can rely on a statement from you, signed under penalties of perjury, that the person lives in your home under their plan of care (Q&A 15).

If box 1 of your W-2 is blank or zero and you don’t count the payments for a credit, you don’t need to report them on your return. Otherwise, follow the IRS Q&A 11 steps, which subtract the payments on Schedule 1.

If an agency pays you as an independent contractor and sends a Form 1099, you report the payments and then subtract them. The payments aren’t self-employment income (Q&As 13 and 14).

You can claim the exclusion for an earlier year by filing Form 1040-X, as long as the refund deadline hasn’t passed. That is generally 3 years from when you filed or 2 years from when you paid the tax, whichever is later (Q&A 10).

Can you count the payments for the Earned Income Credit?

Yes. For open tax years, you can choose to include the payments in earned income for the Earned Income Credit or the additional child tax credit. You must include all of them or none, and they must otherwise be earned income, such as wages (Q&A 9).

Can you still put money in an IRA?

Yes. The SECURE Act of 2019 added a rule for people who exclude difficulty of care payments. If your taxable pay is below the IRA contribution limit, you can raise your nondeductible IRA limit. The increase is the shortfall or the amount you excluded, whichever is less. It applies to contributions made after December 20, 2019 (IRC §408(o)(5)). These contributions aren’t deductible.

A similar rule for workplace defined contribution plans, such as a 401(k), counts the excluded payments as pay, and treats the extra contributions as after-tax money (IRC §415(c)(8)).

Do Social Security, Medicare and unemployment taxes still apply?

Notice 2014-7 doesn’t decide whether FICA (Social Security and Medicare) or FUTA (federal unemployment) tax applies. The IRS Q&A answers for FICA. The answer depends on who your employer is:

Household work exceptions: these taxes generally don’t apply if you care for your spouse, or if you are under 21 and care for your parent. Wages a person pays their own parent are generally exempt too, except in some cases where the parent cares for the employer’s child. They also don’t apply if one household employer pays you less than $3,000 in cash wages in 2026 (IRS Publication 926, Q&A 19).

Who your employer is depends on who has the right to direct and control your work. If you think you are classified wrongly, you can file Form SS-8 to ask the IRS to decide (Q&A 12).

The IRS Q&A doesn’t address FUTA. When the care recipient is a household employer, Publication 926 says wages they pay their spouse, their child under 21 or their parent aren’t FUTA wages. Otherwise, a household employer owes FUTA once they pay $1,000 or more in cash wages to household employees in any calendar quarter of the current or prior year. The employer pays it; it isn’t withheld from your pay.

This page covers federal tax only. Ask your state tax agency about state income tax.

FAQ

Do I have to be related to the person I care for? No. Notice 2014-7 applies whether the care provider is related or unrelated.

Does it matter whether the state or an agency pays me? No. Payments from the state or from a certified Medicaid provider, such as an agency, can qualify.

What is IRS Notice 2014-7? IRS guidance that treats qualified Medicaid waiver payments as difficulty of care payments, excluded from income under section 131. It applies to payments received on or after January 3, 2014. The waiver itself is the Medicaid program that pays for care at home; see what a Medicaid waiver is and how payments reach the caregiver.

General information, not tax advice. Tax rules change, and your situation may differ. Check with a tax professional or the IRS before you file.